PRESS BRIEFING BY SENIOR ADMINISTRATION OFFICIAL ON CASPIAN SEA DIPLOMACY AND THE BAKU-CEYHAN PIPELINE

Conrad International Hotel Istanbul, Turkey

9:13 P.M. (L)

SENIOR ADMINISTRATION OFFICIAL: Hello. I'd like to go over briefly the reasons why we support an east-west multiple pipeline strategy for the Caspian and Caucasus. I'd like to talk a little bit about the history behind where this has all come from, and then briefly about what will happen tomorrow and beyond tomorrow.

We usually talk about four basic principles that underly our support for a Caspian energy policy. They include our commitment to the sovereignty and independence of the new states of the Caspian region, and an effort to enhance their economic prospects.

The second one has to do with improving the energy security of the United States, Turkey and our other allies; the free flow of energy resources from the Caspian to western markets. The third has to do with creating and advancing commercial opportunities for American companies -- and other companies, as well.

And the fourth, which is probably the most important, is to prove that economic cooperation -- economic and political cooperation is a much better path for the region than the political rivalry which has characterized much of their history. And it is creating a new web of relationships that will support the economic and political independence of these states.

All of this dates back five, six years -- five years ago, in 1994, Azerbaijan signed production-sharing agreements with a consortium of companies, the Azeri International Operating Company, and that has explored and developed oil wells in the offshore waters of Azerbaijan. In 1995, these companies decided to build two pipelines from Azerbaijan, one going north to the Russian Black Sea port of Novorossisk -- and we'll hand out fact sheets that will give you the spelling -- and a second early oil pipeline to Supsa, Georgia, also on the Black Sea.

The western line to Supsa opened in April 1999, and it is operating at its full capacity of 115,000 barrels a day. The pipeline to Novorossisk opened; it has been closed because of events in Chechnya.

In 1996, at the Gore-Chernomyrdin level, there was agreement that broke a logjam and led to agreement on a Caspian pipeline consortium pipeline from Kazakhstan on the east side of the Caspian to Novorossisk, as well. That pipeline is now under construction.

In 1998, the U.S. Trade and Development Agency, Export-Import Bank and OPIC created a financing center here in Ankara to help facilitate the U.S. financial participation in the multiple-

pipeline strategy. In 1998, in July 1998, the President appointed a Special Advisor to the President and Secretary of State for Caspian Basin Energy Diplomacy -- long title -- and that job has been filled since. In 1998, the presidents of Turkey, Georgia, Azerbaijan, Kazakhstan, and Uzbekistan signed an Ankara Declaration, which talked about Baku-Ceyhan as the main oil export route from Baku to Ceyhan and the idea that oil would go trans-Caspian into that pipeline. And they also announced support for a trans-Caspian gas pipeline.

In February of 1999, Turkmenistan selected a consortium, PSG International, and later Shell, to build that pipeline as part of Turkmenistan's sales-purchase agreement and bilateral relationship to sell the gas to Turkey.

I'd like to try to describe, I'd like to suggest to you, that this is really quite spectacular stuff that is happening. Last Sunday evening, we were sitting there negotiating the trans-Caspian Gas Pipeline Framework Declaration, which will be signed tomorrow, and in the room we had senior representatives from Turkmenistan, Azarbaijan, Georgia, Turkey and the United States. It was the 72nd anniversary of the Bolshevic Revolution. And the idea of sitting in a room and talking about a pipeline which will be a commercial pipeline to sell gas from Turkmenistan through Georgia and Azerbaijan to Turkey and on to Europe, eventually, is really quite remarkable.

Similarly, for the Baku-Ceyhan pipeline. The idea that these oil countries will be able to develop a pipeline system that goes westward is an important new step. Our policy is a multiple pipeline strategy. We have supported pipelines that go north, as I described -- the Baku-Novorossisk early pipeline, and now the trans-Caspian Caspian Pipeline Corporation pipeline; these go through Russia, but the company and the countries have all said they need to have multiple routes, they need to be able to have multiple ways to the marketplace, they want to be able to export their oil and gas directly to hard currency markets without going north or south through countries that compete with them.

The Baku-Ceyhan main oil pipeline will be a million-barrel pipeline. The object will be to put it into service in 2004. The trans-Caspian gas pipeline from Turkmenistan to Turkey, size is still to be determined, but the sales-purchase agreement was for 16 billion cubic meters a year.

So these are substantial undertakings. They are long pipelines that go across multiple national borders. Political cooperation is essential. It is almost unprecedented to see supplier countries sending oil across other potential competitors to the western markets. We are absolutely delighted with the progress and the cooperation that has been shown by the countries and the energy companies that are involved. A U.S. representative, speaking in September, talked about how, on the oil pipeline, the companies were using the process of negotiation to block a test of the project in the marketplace.

What will be signed tomorrow? Tomorrow, there will be signed the inter-governmental agreement between Azerbaijan, Georgia and Turkey for the Baku-Tbilisi-Ceyhan main export pipeline. This million-barrel pipeline, as I described, is a significant effort. It will require much more work before it comes into operation in 2004. The inter-governmental agreement and the host government agreements and turnkey contract and guarantee -- which will be either initialed and/or signed tomorrow -- though, provide the legal framework.

This is a first step. There is a lot more work to go. Beyond Istanbul, the next steps will be meetings of shippers, potential shippers, development of the actual financial package that will underwrite the construction, selection of contractors -- in one case, in Turkey, Botas which is the national energy company, will be doing the work, but they still need to select contractors for Azerbaijan and Georgia. It will require a what's known as open season, in which the actual shippers pledge their volumes to the pipeline; and all of this will come together, hopefully, at the end of next year or in early 2001, when this will go to the marketplace and construction will commence.

The gas pipeline, we hope, will go on a faster track, it's a little simpler project. There's already a sales-purchase agreement which provides the basis for financing. The real difficulties for the trans-Caspian pipeline have been trying to deal with the right-of-way questions that are necessary to get the pipeline from Turkmenistan to Turkey. But the object for that is to reach financial closing at the end of 2000, start construction and deliver the first gas to Turkey by the end of 2002.

These are major projects, these are major steps forward, these are historic documents in terms of the cooperation; but nobody should underestimate the hard work and the need for continued cooperation, both between the governments and with the companies that will be necessary to make all this come together.

The United States, starting with the President, has made this a high object for U.S. foreign policy. As the President said the other day, these pipelines are not often in the U.S. headlines, but the impact that they can have for world energy markets, the impact that they will have for U.S. energy security, the impact that they can have for regional security and security on the eastern flank of NATO and Europe, it's a profound impact. It may be 10 or 20 years before we're actually able to gauge the benefit that this multiple pipeline strategy will have. But he said to President Demirel and others that this is really an important achievement, a step forward and we, the United States, will continue to support this effort with our diplomacy and through the Export-Import Bank, Overseas Private Development Corporation and Trade and Development Agency.

They work in the context of a commercial deal, though, and so the effort now is to prove that these pipeline projects are actually commercially viable.

That's probably enough to say.

Q If it's all so good, why do Russians think that it's so bad? They seem to be fearing that they'll be cut out somehow. How will it affect them?

SENIOR ADMINISTRATION OFFICIAL: Historically, energy from the Caspian has gone north, only north, and then from Russia into world markets. As I said, the countries and the energy companies that are operating in the region believe that they need to have a multiple pipeline system, and that's what we support -- western routes, as well as the routes that already are established or are under construction in Russia. They're not being cut out; the Caspian Pipeline Consortium is a major pipeline from Kazakhstan to the Russian port of Novorossisk.

But as part of the development of their own identity and their own economic vitality, the countries of the region and Turkey, and the United States in support, believe that the countries can -- need, and should have, multiple routes to the world market. So we're supporting an effort that is the effort of Turkey and the regional countries.

Q Sir, you referred to the million-barrel pipeline. I assume you mean million barrel a day? Also, what is the specific U.S. corporate and U.S. government participation on these deals?

SENIOR ADMINISTRATION OFFICIAL: The specific corporate involvement in the oil pipeline remains to be determined now that this will go to the marketplace. There are three American companies that are part of the Azeri International Operating Company: Exxon, Unocal and Pennzoil. There are other American companies that are exploring in Azerbaijan. There are a number of major American companies -- Chevron, Texaco, Mobil -- which are active in Kazakhstan or Turkmenistan. So that in terms of U.S. energy companies, there are a number of companies that are active either on the east or west. They are supported by oil service companies, several of which are American.

The contractor for the Azeri-Georgia fraction may or may not include representative American companies. The gas pipeline -- you know, the consortium that will build it includes the PSG International Corporation, which is a joint venture by GE Capital and Bechtel. So there are significant interests there.

Q What does the President -- when he signed, what does he sign tomorrow and what does he commit the United States to do?

SENIOR ADMINISTRATION OFFICIAL: The President is not committing us to do anything; the President is witnessing the signature of an Istanbul declaration that will be part of the oil package, and he is witnessing the trans-Caspian Gas Pipeline Declaration, which is a framework document that will provide the basis for negotiating the actual legal package for the gas pipeline.

What the President has said, and I suspect may say again tomorrow, is that as these deals move to the commercial phase, and when they show that they are commercially viable, part of that commercial viability will include support by Ex-Im, OPIC and TDA. TDA has been active all through the process in terms of project analysis and feasibility studies. OPIC and Ex-Im will now come in to cover risk or the sale of U.S. goods and services.

Q Any security guarantee, though, for the --

SENIOR ADMINISTRATION OFFICIAL: No.

Q Has Turkey made an agreement to guarantee cost over runs, which I understand is part of the financial package you're trying to put together?

SENIOR ADMINISTRATION OFFICIAL: One of the documents for the oil pipeline will be a guarantee by Turkey for the costs of that fraction of the pipeline that is being built by Botas, in Turkey. The approximate cost of that fraction of the pipeline will be $1.4 billion, more or less. The overall Baku-Ceyhan oil pipeline is estimated at about $2.4 billion, but that will now be -- that number will become much more specific once basic and detailed engineering is done.

Q And what prospects do you see for getting a commercially viable supply of oil through the pipeline? I understand maybe 10 percent of what is needed is now being produced.

SENIOR ADMINISTRATION OFFICIAL: We believe that in some ways, the discussions have revolved around the oil that is available to AIOC. And what we've been talking about, what Secretary Richardson and other officials have talked about is a main export pipeline that draws volumes from both sides of the Caspian, from Kazakhstan and/or Turkmenistan, as well as Azerbaijan. And even in Azerbaijan, there are volumes and potential volumes beyond AIOC.

They've always argued that they're the only game in town, and that's why you couldn't have this pipeline. We've always said that if you take a good deal to the marketplace, with the right price and the right construction schedule, that the marketplace will respond. Now we're finally going to get a chance to see next year whether or not there are the volumes. We believe there are.

Q Yes, I want to clarify your earlier comments. Turkey's cost guarantee now is $1.4 billion because that's the fraction of the pipeline cost that's being built on their territory. Was their earlier cost guarantee $2.5 billion?

SENIOR ADMINISTRATION OFFICIAL: There was a discussion of whether or not Turkey would be the turnkey contractor for the whole pipeline, from Baku -- well, I better do it right -- from Baku all the way to Ceyhan. And the approximate costs of that pipeline would have been -- or the estimated costs would have been $2.4 billion. But because of a series of issues that related to third-country risk, and the difficulty of Turkey guaranteeing what would happen in Georgia and Azerbaijan. They settled on just building the Turkish portion and changed the guarantee commensurately.

Q Can I ask another question also? There seems to be a problem in Georgia actually allocated land for a trans-Caspian gas line. Has that been resolved yet?

SENIOR ADMINISTRATION OFFICIAL: We're not -- on the gas line, we're not to that point.

Q But maybe with the pipeline

SENIOR ADMINISTRATION OFFICIAL: What President Shevardnadze will sign tomorrow is an agreement that he will help facilitate, in a variety of ways, the early development of a gas pipeline. That will require land acquisition in Georgia, land that's privately owned. And the companies will have to go out and buy the land -- but hopefully, with the help or encouragement of the government.

Q Yes, I have a two-fold question. The first is, how close are you to some sort of -- how close are you to some sort of financial framework, first of all? And second of all, how much has the falling price of oil affected your being able to come to some sort of financial framework agreement?

SENIOR ADMINISTRATION OFFICIAL: How close are we to a financial package? I think the financial package is still to be developed. This is the legal basis, these four documents -- well, it's more than four; it's six documents: one inter-governmental agreement, three host government agreements, the turnkey contract and the guarantee. Those are the six documents that are part of the Baku-Ceyhan package. That's the legal framework. The next step will be probably early next, or middle next month, a preliminary meeting of shippers. After the intergovernmental agreements are ratified by parliaments early in 2000 -- hopefully in January, 2000 -- then there will be a creation of a main export pipeline company, those companies that are going to be sponsors of the pipeline.

And then, there will be an open season where shippers will make actual commitments, and out of that process, the package will be taken to the marketplace for financing.

Q So you're months away from a financing framework, do you think?

SENIOR ADMINISTRATION OFFICIAL: The financing framework, we are necessarily months away, because until you have actual shippers in the room, until you do basic engineering six months, until you do detailed engineering nine months, until you have the open season and pledges of through-put, you can't go to the marketplace. There is a lot of work between creating the legal framework and actually getting a banker to put $2.4 billion out, or whatever the share they'll put out is.

Q And the second part of the question about the cost of oil, and if you could explain what you mean by the "turnkey paper" that you're going to be signing tomorrow?

SENIOR ADMINISTRATION OFFICIAL: Actually, the price of oil has gone up substantially in the last year from whatever it was, $10, $12 to whatever it is now. The companies are very conservative in terms of the dollar -- different companies use different figures, but they're quite conservative in regard to the current price of oil, so if you assume that the world economy is going to continue to go forward, that oil prices will remain firm you have to link a lot of things together -- what will OPEC do, what will economic growth be.

But if you assume that prices aren't going to come down to last year's lows, then this pipeline is going to work. The turnkey contract is simply the choice by Turkey of Botas, their energy pipeline company, to do the construction of the pipeline in Turkey. And it is a legal contract that says how far apart the posts will be for the fence and what the capacity of the pipe will be and thickness of the pipe and pressure of the pipe and a whole lot of things that I don't begin to understand.

Q Do you need three other turnkey contracts then, to make four --

SENIOR ADMINISTRATION OFFICIAL: There will be contracts for Azerbaijan and Georgia; that will be done by the MEPCO, the main export pipeline company, when it's created.

Q I just want to get back to Russia. No matter how you might try to soft-pedal it, isn't the real significance of this is that this is a long-term strategic triumph over Russia's historic aspirations and interests in Central Asia? And how will that strategic defeat for Russia, do you think, affect U.S.-Russian relations? I mean, you talked about the intensity of opposition, nationalist opposition, in Russia to this project.

SENIOR ADMINISTRATION OFFICIAL: The answer to that is, I don't actually still beat my wife.

Q It's not a strategic triumph over Russian interests in Central Asia?

SENIOR ADMINISTRATION OFFICIAL: No. I mean, look, what we're talking about is countries which, in 1992, became independent. As independent countries, the world is really quite different now. And we're talking about a multiple-pipelines system. Some pipelines will go north to Russia, following the traditional routes. Other pipelines will go west to hard-currency markets. It is conceivable that some pipelines -- from Kazakhstan, for instance, or Turkmenistan, for instance -- may go east, towards China.

The fact of the matter is that the world on the verge of the new millennium is quite different that was the last half of the 20th century. So with countries that are independent, and integrating themselves into the western marketplace, it makes sense for them to want to have multiple avenues to export their oil and gas.

Q But even Russian interests and aspirations in Central Asia have changed.

SENIOR ADMINISTRATION OFFICIAL: The Russians are part of this package. Lukoil is part of AIOC. The CPC pipeline goes through Russia to Novorossisk. We would welcome Russian oil into Baku-Ceyhan. So it's not excluding them; it's just a different kind of cooperation.

Q On the second of the two early pipelines you mentioned, one that's been shut down due to the fighting in Chechnya. Could you tell us what the points -- where that pipeline begins and ends, how much oil it moves, when it opened and when it got shut down?

SENIOR ADMINISTRATION OFFICIAL: It was shut down earlier this -- it operates on and off. It was shut down earlier this summer, and is on and off. It goes from Baku to Novorossisk. And I forget how much oil it carries. But maybe we can find that out for you.

Q Dr. Brzezinsky raised the issue in connection with this, that to the extent that the Russians keep hammering away at the Chechnyans, it puts pressure -- continues to put pressure on Shevardnadze, and it sort of raises the issue of what is the strategic importance or value of a pipeline that goes through a Georgia that's going to be under Russia's thumb one way or the other?

SENIOR ADMINISTRATION OFFICIAL: Well, we actually have welcomed the democratic elections a few weeks ago. We think that Georgia is making progress in terms of -- remarkable progress in terms of developing participatory democracy and in terms of addressing a series of issues that they need to. And we are quite confident that that support for Georgia -- which we give and is important to the countries of the region -- is going to continue.

We strongly support the idea of Georgian independence, and the pipelines, the multiple-pipeline strategy in the east-west energy corridor, which is part of a vision that President Shevardnadze has helped to set, he's talked a lot about an east-west transportation corridor -- all of these things provide kind of the economic and political ties which will help to strengthen Georgia's independence and help them to develop their links to the west.

Q I have two questions. Back on Russia -- there were reports that the Russian Deputy Foreign Minister and Energy Minister went to Baku this weekend to try to scuttle this deal. Do you know anything about that, and do you worry that they may continue to try to undermine this?

The second question is, you're making this sound like a done deal, that after the documents are signed tomorrow, that this will all happen. Isn't it true that some in the Azari Consortium have not signed off on this and have grave concerns about the feasibility of it?

SENIOR ADMINISTRATION OFFICIAL: On the first question, I will simply tell you that I guess what you say is true; I was here, but I read what you said, or read that he visited, but President Aliyev will be one of the presidents who signs the documents tomorrow for Baku-Ceyhan and for the trans-Caspian gas pipeline.

On the question of a done deal, if that's what you thought, what I was trying to say is, this is a first step, but there is a whole lot of work that is going to remain, that will need to be done, to bring these pipelines to fruition. But this first step is quite historic, this kind of cooperation, this kind of economic and political cooperation just hasn't happened among these countries.